1 November 1991 Income Tax Severed Letter 91M11265 F - Canadian Exploration Expenses

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

QUESTION

4.     Paragraph 66.1(6)(a) provides the definition of Canadian exploration expense ("CEE"). Within that definition, subparagraph (iii.1) includes any expense incurred by the taxpayer "after November 16, 1978 for the purpose of bringing a new mine in a mineral resource in Canada into production in reasonable commercial quantities and incurred before the coming into production of the new mine".  Could CEE include operating losses incurred in that period of time prior to the beginning of commercial production of the mine?

ANSWER

4.        The Department's long-standing position is that net operating expenses would be eligible for inclusion in CEE provided that they are incurred for the purpose specified in subparagraph 66.1(6)(a)(iii.1) and before the commencement of commercial production of the new mine.

We understand that for accounting purposes, net preproduction costs are treated as expenses on the income statement by some companies and as deferred costs on the balance sheet by other companies.

If the taxpayer treats revenue from production prior to commercial production as income for accounting purposes, then it must do so for income tax purposes and the cost of that production must then be deducted as cost of goods sold. In this case, cumulative CEE would not be increased by the cost of that production and would not be reduced by the amount of the related pre-production revenue. Net profit, if any, would be eligible for inclusion in resource profits under Regulation 1204.

Where the taxpayer has deferred net pre-production costs on its balance sheet, the taxpayer must treat operating expenses incurred prior to commencement of commercial production as CEE under subparagraph 66.1(6)(a)(iii.1) provided that it so qualifies.  Any pre-production revenue related thereto would reduce the amount of the operating expenses that can be added to cumulative CEE. The resulting net amount of CEE may also be eligible for inclusion in the taxpayer's earned depletion base under Regulation 1205. However, the pre-production revenue would not be eligible for inclusion in resource profits under Regulation 1204.

Furthermore, for tax purposes, the taxpayer's inventory produced prior to and remaining on hand at the beginning of the date of commencement of commercial production should be valued pursuant to subsection 10(1) and Regulation 1801. The value of this inventory would reduce the taxpayer's cumulative CEE if the taxpayer had added the costs thereof to cumulative CEE. However, revenue from subsequent sales of the inventory would not reduce cumulative CEE and the profit therefrom may be eligible for inclusion in resource profits.